Mid-market Slows Spending as US Growth Expectations Moderate: Survey

Save Article

Spending among middle-market companies has slowed as executives’ growth expectations for the U.S. economy have moderated, according to the survey report, America’s Economic Engine: Tapping the Brakes, from Deloitte Growth Enterprise Services.

“Compared to survey responses over the last four years, fewer executives from mid-market companies indicated that they expect the economy to expand at a robust rate,” says Roger Nanney, vice chairman, Deloitte LLP, and national managing partner of Deloitte Growth Enterprise Services. “Executive opinion is indicating a pullback in expectations for growth in profits, prices and capital investment.”

According to the report, the surveyed executives’ more conservative outlook may be tied to the belief that the economy will not grow in excess of 2% during 2016, a view held by 29% of the more than 500 respondents surveyed during the fall of 2015 and the highest percentage since the spring 2014 survey results, according to the report. Further, only 10% of the surveyed executives were extremely confident that the economy would improve in the next two years, down from 20% since fall 2014.

The spending slowdown reported by many respondents translated into more modest growth across a number of business metrics at the respondents’ companies. For example, the number of executives reporting growth in profits and gross profit margin fell significantly. Lack of pricing power seems to be one of the drivers of this expectation as 59% of respondents reported holding prices steady.

Further, slowing revenue growth among some surveyed executives also could be contributing to their cautious views, with fast-growing companies ratcheting back their expectations for 2016. Expectations for many metrics, including productivity, for the year remained optimistic but at a more conservative level.

Barriers to Company Growth

Mid-market executives pointed to several growth barriers and threats to their business, including cost of health care, regulatory compliance and concerns related to interest rates.More than half of executives (53%) cited rising health care costs as the top obstacle to U.S. growth, and more than one-third (34%) name it as the second biggest obstacle to company growth, behind the uncertain economic outlook.

The survey also found rising interest rates were a top concern among surveyed mid-market executives. More than one-third (33%) considered rising rates an obstacle to U.S. growth. Roughly 40% of executives viewed keeping rates low as the second most important step the government could take to support business growth, nearly as high as reducing corporate tax rates.

While only one in 10 of the executives cited the availability and cost of credit as a constraint to their business, those who believed their company will be able to tap internal sources to meet their financing needs fell to 25% from 32% in the spring 2015 survey, while asset-based financing and secured loans both climbed. That may help explain why a higher proportion of executives—18% versus 13% in the spring 2015 survey—believed that easing bank lending practices will help U.S. growth in 2016.

Rising Investment in Hiring and Technology

“One area where we are seeing mid-market executives adopting a long-term view is in training and development of talent,” Mr. Nanney observes. “Prioritization of investments in talent and building a diverse workforce can bridge the skills gap and help enable middle market enterprises to achieve growth expectations,” he adds.

Hiring and training took the top spots when identifying a company’s biggest investment for the first time since the inaugural survey in 2011. More than half (56%) of companies reported their workforces grew in 2015. Nearly two-thirds of respondents agreed that it is becoming more difficult to find skilled talent to meet their business needs. Further, more than half of respondents (51%) said training will dominate their talent investments in 2016. Diversity also will be a key talent investment, as 63% of executives cited that their company has, or is developing, programs to foster diversity and inclusion.

Technology investment topped the capital expenditures list of surveyed executives. Results indicated that technology is consistently seen as having the greatest potential for increased productivity within companies, according to 66% of executives. More than half of respondents said they expected to invest in cloud computing/software as a service (58%) and data analytics/business intelligence (53%) in 2016.

Expectations for Slowdown in M&A

The latest survey indicated a potential slowdown in middle market M&A activity. The number of executives who said their company is likely or very likely to participate in a merger in 2016 dropped.

Surveyed executives also considered it is slightly less likely that their company could be an acquisition target in 2016. However, they thought the most likely buyers would be a direct domestic competitor, a domestic business partner or a private equity firm.

“The slowdown this survey portrays is far from a hard stop, but rather a tapping of the brakes after so much forward momentum,” notes Mr. Nanney. “Despite mounting challenges that appear to be hindering growth in the U.S. economy, many middle market companies are setting their sights on the horizon by making the investments needed to fuel their long-term growth, but with moderation,” he adds.

About the Survey

From October 22 to November 4, 2015, a Deloitte survey conducted by OnResearch, a market research firm, polled 522 executives at U.S. mid-sized companies about their expectations, experiences and plans for becoming more competitive in the current economic environment. Respondents were limited to executives at mid-market companies with annual revenues between $50 million and $1 billion.

Related Deloitte Insights

Anticipating higher investment post tax reform, North American CFOs voiced very strong internal concerns about driving initiatives and securing the talent they need, according to Deloitte’s first-quarter 2018 CFO Signals™ survey. Talent concerns have topped CFOs’ list of internal risks for many quarters, and their focus on talent acquisition, quality, and retention seems to have intensified. Despite talent constraints, 69% of the 155 CFOs responding to the survey say now is a good time to be taking greater risk—up from 63% in Q4 2017, and a new survey high.

Many energy companies are moving ahead with their risk and compliance initiatives, even as regulatory uncertainty remains a significant and ongoing challenge. Even if lawmakers and regulators make definitive changes, companies must continue to drive effectiveness and efficiency of their risk and compliance programs so they meet applicable laws, regulations and supervisory expectations. Fortunately, many of the changes companies are making to achieve compliance are useful improvements from a business perspective and worth doing no matter how the future unfolds.

In the fourth quarter of 2017 monetary policy remained favorable, uncertainty was muted, consumer demand was solid, and, in the U.S., tax reform moved from promise to reality. Little wonder, then, that there are multiple signs of optimism in the latest Global CFO Signals report from Deloitte Touche Tohmatsu Limited. CFOs in the eight regions surveyed expressed positive outlooks about their organizations’ financial prospects, growth metrics, and, in many cases, their countries’ economic outlooks.

Views & Analysis

Culture is often an overlooked foundation of an organization’s strategy and performance. Yet today diagnostic tools, cognitive analytics, risk sensing and other technologies can provide organizations insights into day-to-day risk factors embedded within their cultures. Carey Oven, Deloitte Risk and Financial Advisory partner, Deloitte & Touche LLP, discusses the challenges organizations face in improving their culture risk profile and ways they can help protect their culture and monitor risks that could damage it.

Recent corporate scandals linked to problematic company cultures have led directors to look for ways to better monitor corporate culture, while trying to understand potential risks and address problems before they become a significant challenge. By treating culture risk as part of an integrated process of oversight that addresses strategy, performance, and risk—and taking a proactive and persistent approach—boards can improve their oversight of culture risk. Learn some general approaches to culture risk oversight that management and boards alike should consider.

Traditionally, internal audit (IA) has focused on providing assurance with respect to known risks and the effectiveness of controls in mitigating those risks. Regulators, however, are increasingly interested in an organization’s ability to identify blind spots and other vulnerabilities that may undermine the integrity of the risk management environment, including the risk of misconduct. IA functions can play a pivotal role by substantively testing culture and identifying potential risk-related outliers that may not be visible via other means, such as supervisory frameworks, escalations, compliance assessment and testing, and previous audits.

Editor's Choice

Robert Hull, chairman of the board of SPX FLOW and a director at Bojangles’ Inc., draws on a deep background in finance and operations for his current governance roles. The former CFO of Lowe’s Companies discusses how his finance career prepared him for a board role, and offers suggestions for what finance chiefs seeking to serve on a board can do to prepare. He also talks about the board’s role in risk management and strategy oversight.

New training models are providing organizations tools to measure, monitor, and address ethical and unethical behaviors. However, ethics training still has far to go to be effective, according to both Christopher Adkins, executive director of the Notre Dame Deloitte Center for Ethical Leadership, and Maureen Mohlenkamp, Deloitte Risk and Financial Advisory principal, Deloitte & Touche LLP. They discuss ways to strengthen ethics programs, advances in whistleblower helplines and how technology is impacting ethics training.

Digital risks are becoming a rising concern for the C-suite and boards, as industries continue to converge and companies adopt new business models to compete. Understand what steps can be deployed to address the strategic risks that come with today’s digital technologies in this conversation with William Ribaudo, managing partner of Deloitte Risk and Financial Advisory’s Digital Risk Venture Portfolio, Deloitte & Touche LLP. Also, learn why organizations should reassess their business models to understand their digital maturity.

About Deloitte Insights

Deloitte’s Insights for C-suite executives and board members provide information and resources to help address the challenges of managing risk for both value creation and protection, as well as increasing compliance requirements.